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Research finds US firms talk cheap on climate change


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    Here is the second in our series of regular articles on current academic research into a range of sustainable investment topics. The papers discussed were presented at the latest annual GRASFI conference.

    Compelling academic papers

    The Global Research Alliance for Sustainable Finance and Investment is a collaboration of universities committed to producing high-quality interdisciplinary research and teaching curricula on sustainable finance and investment. In this series, we highlight compelling papers presented at the latest GRASFI conference, with a comment from a ‘practitioner’ at BNP Paribas Asset Management.   

    As the sustainable investor for a changing world, BNP Paribas Asset Management sponsors GRASFI’s efforts to bring academic rigour to the challenges of sustainable finance and investment. Through its sponsorship, BNPP AM is able to access leading academic research into sustainable finance and investment, helping to inform the broader debate. Our goal is to share these reflections with clients and the industry. Visit the GRASFI Conference website.   

    US firms are side-stepping their environmental, social and governance responsibilities by passing their greenhouse gas emissions down the supply chain, academic research has found.  

    In the paper Outsourcing climate change, the authors [1] find that businesses’ public commitments to a better environment are not what they may seem, with some companies ‘bringing carbon emissions down in local markets at the cost of increasing emissions abroad’.

    Analysis of 73 966 firm-country-year observations from 1 254 US firms and 178 exporting countries (after merging two key databases for the 2006-2018 period) found that rather than genuinely targeting the transition to net zero as laid out in the Paris Agreement, companies are increasing greenhouse gas emissions as they expand.

    However, rather than reporting a true representation of their emissions, they push the responsibility further down the supply chain.

    Outsourcing pollution along the supply chain

    The authors cite evidence to suggest firms maintain a reasonably stable carbon footprint (Scope 1 emissions) over time while increasing indirect emissions via suppliers (upstream scope 3) to support business growth and production needs. The surge in supplier-generated indirect emissions, especially after the Paris Agreement, points to pollution being outsourced along the supply chain while curbing self-generated emissions.

    The paper uses Proctor & Gamble as an example. The Natural Resources Defense Council (NRDC) reports that P&G’s commitments to halve pollution by 2030 only apply to Scopes 1 and 2 emissions. [2]

    NRDC alleges that if P&G were to include all its emissions from the production of its raw materials to the disposal of its products, its carbon emissions would be about 215 million metric tons of GHG per year. Only 4.3 million would be attributed to Scope 1 and 2, indicating that P&G’s GHG target applies to only 2% of its total emissions. [3]

    Without accounting for Scope 3 emissions through supply chains, firms fail to fully account for total GHG emissions attributable to their products.

    Targeting emerging markets as an emissions sink

    Troublingly, the paper reports that US companies exploit poorer countries by taking advantage of weaker legislation to offload GHG emissions overseas.

    The authors state: “We contend that less developed countries are more concerned about economic survival than environmental issues and thus have weaker environmental regulations and lower social awareness towards environmental protection. These countries would be less costly alternatives for firms that face fairly intense regulatory and social pressure in the United States.”

    The paper found evidence that rather than regulation, stakeholder engagement could be a more effective way to drive positive and genuine environmental behaviour.

    The paper says: “Our findings suggest that firms engage less in carbon outsourcing when they have more concentrated government customers, green corporate customers, and green institutional shareholders. The results lend support to these external mechanisms behind corporate environmental policies.”

    Conversely – and possibly counterintuitively – the research suggests that firms with overt green credentials with a positive reputation for managing ESG risk were motivated to outsource emissions to maintain the illusion of green credibility.

    The authors say: “In maintaining these benefits, firms with higher ESG ratings and more ESG-oriented CEOs and directors face greater internal pressure to uphold their domestic reputations by shifting pollution-intensive production overseas through the upstream supply chain.”

    The authors further find that a firm’s likelihood of investing in pollution abatement activity and its incentive to develop green technologies decrease as its carbon exports grow.

    Emissions outsourcing appears to be a faster and cheaper way for companies to manage their own carbon footprints, allowing them to adopt a lean production process to reduce direct emissions domestically and improve profitability.

    However, such outsourcing is also associated with an increased cost of equity capital and reduced company value. These firms have higher reputational risk (measured using RepRisk data). Therefore, investors may attach a carbon premium to the outsourcing risk of these firms.

    Tackling greenwashing

    To overcome greenwashing, the authors recommend ‘environmentally-conscious investors and consumers to not only carefully investigate a firm’s Scope 1 emissions, but all of the emissions that its activities and products produce to better evaluate how green the firm truly is’.

    They call on policymakers to review their climate change legislation and improve international cooperation. They argue that a single country cannot solve the climate problem, ‘even if it can achieve a carbon-neutral economy’.

    They say: “Our results call for international engagements between policymakers and other stakeholders to support cost-effective policy measures to mitigate global climate risks and support low carbon investments. These results might also be useful for nations to revise their climate action plans as set out under the 2015 Paris Climate Agreement and to close the gap between what they have pledged and what is needed.”

    he authors are clear that while investors and governments have an important role to play in both encouraging green behaviour and policing company reporting, it is down to firms themselves to do the right thing. “Companies should take full responsibility for their climate footprints.”

    Senior research analyst Thibaut Heurtebize at BNP Paribas Asset Management said, “As the sustainable finance industry continues on its journey toward net zero, this research serves as an important reminder of the need for improved corporate disclosure and/or estimation models focused on scope 3 carbon emissions.” 


    [1] Rui Dai, Wharton Research Data Services (WRDS); Rui Duan, York University – Schulich School of Business;

    Hao Liang, Singapore Management University – Lee Kong Chian School of Business; European Corporate Governance Institute (ECGI); Lilian Ng, Schulich School of Business, York University; European Corporate Governance Institute (ECGI)  

    [2] See P&G, You Can’t Outsource Sustainability on  

    [3] P&G says that since 2010, it reduced absolute Scope 1 & Scope 2 emissions across global operations by 56% through energy efficiency and renewal energy sourcing; go to 


    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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